October 21, 2022
By: Allen H. Denson, Daniel C. Fishbein
This week the Fifth Circuit delivered a major setback to the CFPB’s enforcement and rulemaking authority. In Community Financial Services Association of America, et al. v. Consumer Financial Protection Bureau (CFSA v. CFPB), the Fifth Circuit ruled that the CFPB’s funding structure violated the Appropriations Clause of the Constitution, which states that "[n]o money may be taken from the Treasury but only in Consequences of Appropriations made under Law." In doing so, the court focused on the unique funding structure of the Bureau, which is intentionally designed to be insulated from Congress’s appropriations power.
The ruling has broad implications for the future of the CFPB, the most immediate result of which was the Fifth Circuit’s invalidation of the Bureau’s payday rule – the core issue of the action. The Bureau's 2017 payday rule forbids lenders from attempting to withdraw payments for loans covered by consumers' accounts if two withdrawal attempts have failed because of insufficient funds. In invalidating the rule, the Fifth Circuit reasoned that the CFPB could not have promulgated it without the agency’s unconstitutional funding structure.
What does this mean outside of the payday rule? This decision could have huge implications for all parties involved in consumer financial services. Under the court's reasoning, the CFPB cannot act in accordance with the Constitution in any circumstance because all actions, including conducting examinations, issuing rules, investigating companies, and pursuing enforcement actions, depend on the expending of money from an unconstitutional funding source.
Less clear are the Bureau’s next steps. The agency will likely seek additional review at the Supreme Court, or, before that, from the entire Fifth Circuit. Either court could reverse the panel’s decision. Even if the Fifth Circuit and Supreme Court agree with the decision, they may not adopt an expansive interpretation of the Appropriations Clause which limits Congress's authority or restricts Congress's ability to fund agencies. After all, there are many other agencies, although distinguishable from the CFPB, that are funded outside of congressional appropriations. The Bureau could also seek a legislative fix from Congress in the interim, although that possibility seems unlikely given the current political climate.
For companies that are subject to the CFPB's jurisdiction, but not facing investigations or enforcement actions, this ruling should not alter their compliance approach. But companies that are facing CFPB enforcement will need to make a different calculation. Our expectation is that these companies will be less willing to accept outlandish settlement demands by the Bureau and will instead leverage the Fifth Circuit’s reasoning in court.
However the argument unfolds, the Bureau appears to be facing a years-long struggle for its very existence.
October 21, 2022
By: Allen H. Denson, Daniel C. Fishbein
This week the Fifth Circuit delivered a major setback to the CFPB’s enforcement and rulemaking authority. In Community Financial Services Association of America, et al. v. Consumer Financial Protection Bureau (CFSA v. CFPB), the Fifth Circuit ruled that the CFPB’s funding structure violated the Appropriations Clause of the Constitution, which states that "[n]o money may be taken from the Treasury but only in Consequences of Appropriations made under Law." In doing so, the court focused on the unique funding structure of the Bureau, which is intentionally designed to be insulated from Congress’s appropriations power.
The ruling has broad implications for the future of the CFPB, the most immediate result of which was the Fifth Circuit’s invalidation of the Bureau’s payday rule – the core issue of the action. The Bureau's 2017 payday rule forbids lenders from attempting to withdraw payments for loans covered by consumers' accounts if two withdrawal attempts have failed because of insufficient funds. In invalidating the rule, the Fifth Circuit reasoned that the CFPB could not have promulgated it without the agency’s unconstitutional funding structure.
What does this mean outside of the payday rule? This decision could have huge implications for all parties involved in consumer financial services. Under the court's reasoning, the CFPB cannot act in accordance with the Constitution in any circumstance because all actions, including conducting examinations, issuing rules, investigating companies, and pursuing enforcement actions, depend on the expending of money from an unconstitutional funding source.
Less clear are the Bureau’s next steps. The agency will likely seek additional review at the Supreme Court, or, before that, from the entire Fifth Circuit. Either court could reverse the panel’s decision. Even if the Fifth Circuit and Supreme Court agree with the decision, they may not adopt an expansive interpretation of the Appropriations Clause which limits Congress's authority or restricts Congress's ability to fund agencies. After all, there are many other agencies, although distinguishable from the CFPB, that are funded outside of congressional appropriations. The Bureau could also seek a legislative fix from Congress in the interim, although that possibility seems unlikely given the current political climate.
For companies that are subject to the CFPB's jurisdiction, but not facing investigations or enforcement actions, this ruling should not alter their compliance approach. But companies that are facing CFPB enforcement will need to make a different calculation. Our expectation is that these companies will be less willing to accept outlandish settlement demands by the Bureau and will instead leverage the Fifth Circuit’s reasoning in court.
However the argument unfolds, the Bureau appears to be facing a years-long struggle for its very existence.
